With the S&P 500 down 11% year to date, now is a great time to shop for deals in the market. And while the casino industry may face challenges from inflation and a possible recession, many companies still look poised for long-term success. Let's explore why MGM Resorts International (MGM -0.33%) and Penn Entertainment (PENN 2.35%) should be on your investment watchlist.
MGM Resorts
Down 22% so far this year -- twice as much as the market -- MGM Resorts could be an excellent pick for investors who want to bet on a top gambling stock at a substantial discount to previous highs. The company's industry-leading assets and inflation-resistant business model can help it thrive in this economic environment.
With the U.S. inflation rate hitting 8.5% in July, consumers and businesses are feeling the pinch from higher costs and eroding spending power. But for MGM, this challenge may have a silver lining. As a hospitality company, much of its biggest capital outflows (such as building hotels and resorts) are fixed, not variable, as the hotels have already been constructed, so MGM is not as heavily influenced by inflation.
Image source: Getty Images.
Meanwhile, rising prices elsewhere in the economy can give MGM room to increase its hotel rates while consumers already expect to pay more.
Second-quarter results show MGM Resorts is performing well in this unique economic environment. Net revenue increased 44% to $3.3 billion, driven by strength on the Las Vegas Strip, where sales jumped 113% to $2.1 billion -- far surpassing the $1.4 billion earned before the COVID-19 pandemic.
MGM can maintain its dominance in this key market through the brand power of its iconic properties, such as Mandalay Bay and Bellagio. The company is also bolstering its portfolio with additions like The Cosmopolitan, which was acquired for $1.63 billion in 2022.
Penn Entertainment
If you are looking for a gambling stock at a discount, look no further than Penn Entertainment. Down 29% so far in 2022, the company struggles with competition from larger rivals like MGM, which operates in similar niches (casinos and online gambling). But Penn's reasonable valuation and rapidly growing digital business make it poised for a long-term comeback.
Penn Entertainment was initially a post-pandemic winner because its focus on regional casino operations helped shield it from slowdowns in major gambling hubs like Las Vegas. While this trend seems to have flipped (with Las Vegas roaring back to life), Penn Entertainment is still managing to hold its own.
Second-quarter revenue grew 5.2% to $1.63 billion, driven by strength in the company's interactive segment (including online casinos and sports betting), which saw revenue jump over 99% to $154.9 million. Management plans to ensure success in this business by adding third-party games to its portfolio and creating its own casino games, such as Barstool Blackjack and Barstool Roulette, which are expected to be released in the near future.
With an estimated forward price-to-earnings (P/E) multiple of just 16, Penn Entertainment trades at a substantial discount to the S&P 500 average of 23. And the company returned value to shareholders through buybacks totaling 5.54 million shares at an average price of $30.16 during the second quarter.
Which gambling stock is best for you?
While MGM Resorts and Penn Entertainment both operate in the casino and online gambling business, they have some important differences. MGM's strong brands and exposure to the booming Las Vegas strip make it look more likely to outperform if the economy remains strong. But Penn Entertainment might be the safer pick because its diversified footprint in regional casinos across North America can help shield it from a downturn in the big gambling hubs or any particular geography.
